Testing the validity of purchasing power parity for China: Evidence from the Fourier quantile unit root test. Issue 2 (6th September 2022)

• Record Type: Journal Article
• Authors: Chan, Kenneth S.; Lai, Jennifer T.; Liang, Xiaoyi
• Is Part Of: Review of international economics. Volume 31:Issue 2(2023)
• Page Start: 464
• Page End: 492
• Publication Date: 2022-09-06
• Subjects: China -- Fourier quantile test -- purchasing power parity; International economic relations -- Periodicals; International finance -- Periodicals; Economic policy -- Periodicals; 330
• DOI: 10.1111/roie.12634
• Languages: English
• ISSNs: 0965-7576

Abstract

Abstract: We revisit the purchasing power parity (PPP) between China and its five major trading partners, namely European Union, United States, Brazil, Japan, and Korea. Conventional unit root tests with structural breaks have mostly failed to validate the PPP. Apart from using CPI as the price index, the tradable‐goods price index is also used to test the PPP hypothesis (Balassa–Samuelson effect). Using the Fourier quantile unit root test for the potential structural breaks and non‐Gaussian distribution reveals strong evidence that the PPP holds between China and its five major trading partners.